MNI: BOC Says Has Made Progress on Inflation, Must Finish Job

Bank of Canada Senior Deputy Governor Carolyn Rogers signaled Tuesday that it remains premature to loosen monetary policy and over the medium term the country faces more inflation frictions from "grim" domestic productivity and a less favorable global economy.

"The good news is that monetary policy is working, and inflation has come a long way down. We’re not all the way back to target, and we know we need to finish the job," Rogers said in the text of a speech she's giving in Halifax, Nova Scotia. "But we have made a lot of progress," she said, without directly referencing the Bank's policy rate.

The Bank held its trend-setting overnight rate at the highest since 2001 at 5% earlier this month and most investors see one more hold at the April meeting before a reduction in June. While headline inflation slowed back within the Bank's 1%-3% target range core prices are still running beyond that band, and Governor Tiff Macklem told MNI after the last meeting he needs to see sustained and broad price relief even though he could move quickly if needed.

Without suggesting whether the Bank will raise its estimate of Canada's neutral rate in a review due alongside next month's new economic forecast, Rogers suggested some underpinnings of the economy may be shifting in that direction. "When we look ahead, we see a future where inflation may be more of a threat than it has been over the past few decades. We know that many of the forces that helped create a benign environment for inflation in the past, such as globalization, are going to fade away, or even reverse. We know that changing demographics and the economic impacts of climate change will tend to put upward pressure on prices. Persistent global trade tensions also raise the risk of future inflation."

Most of the speech reviewed Canada's longstanding difficulties boosting productivity. That weakness has persisted despite major corporate tax cuts, the era of low-for-long interest rates, a strategy of attracting skilled immigrants and intense competition from China and Mexico that's cost Canada a big slice of its exports to the U.S. Canada's productivity has fallen from 88% of the U.S. in 1984 to 71% by 2022, she said, the worst performance in the G7 besides Italy, she said. 

Rogers called the loss of efficiency "an emergency." She noted some potential links to lengthy regulatory reviews of major projects and Canada's failure to match skilled immigrants with the right jobs, while stopping short of criticizing government policies directly.